Monday, February 22, 2010

Mike Walrath in an excellent article over at AdExchanger said "What we're really talking about here is the race to build the next-generation digital marketing services company." I would put it more strongly: the DSPs, the ad agencies and the ad networks are on a collision course*.

Once upon a time it was pretty easy to tell who was doing what. Ad agencies worked for marketers and rep firms worked for publishers too small to get the attention of the agencies. But the incredibly quick growth of digital advertising made a hash of all that. Ad networks once were digital rep firms, now they are impossible to categorize, except ad hoc. Digital media buyers once were agencies, now they are impossible to categorize, even ad hoc. There are hundreds of companies that have entered the digital display category in the last five years and almost all of them are difficult to categorize**.

GCA/Savvian put together a Display Advertising Technology Landscape map, showing some 140 companies in 21 categories. Almost every company on that map should be in multiple categories or will be in multiple categories in the next 12 months. Ad networks are becoming DSPs or exchanges, ad exchanges are becoming creative optimizers or DSPs, ad servers and optimizers are becoming exchanges, arbitragers are becoming DSPs or exchanges, rich media companies are becoming optimizers... you name it. It's chaos. Albeit the normal chaos of a promising market.

In broad strokes, I think the future of all this is inevitable. In a few years there will be three layers between the marketer and the publisher: the publisher's agent, the marketplace, and the marketer's agent. The agents will use technology developed by dedicated technology firms to some extent, and they will have proprietary technology to some extent. They will buy data from dedicated data firms to some extent and they will have proprietary data to some extent. The marketplaces will have their own technologies and will come in two flavors: 'exchanges' for fine-tuned purchases and OTC-type enablers for block purchases.

There will be various types of technology firms--from trafficking to API access to optimization--and there will be many types of data firms--from analytics to targeting to ROI estimation. But the number of players between marketer and publisher will shrink from six-ish to three***.

Here's my rough take, in qualitative visual form.

What happens to the agencies, the DSPs and the ad networks in this scenario?

Ad networks will need to choose between becoming a publisher's agent, becoming a marketer's agent, becoming a marketplace, becoming a technology provider or becoming an arbitrageur. They can't be all of these things--or even most of them--anymore, at least not on a large scale (many of them have already chosen a path.) Publishers and marketers aren't thrilled with the inherent conflicts of interest and built-in obfuscation of many of the larger ad nets. As alternatives become more available, they won't put up with them.

DSPs will need to choose between being a technology provider to marketer's agents or being a marketer's agent. Most of the DSPs I know have always claimed to want to be technology providers. They have been pushed into providing agency services because the agency media buyers have not had the requisite competencies to use the DSP tools. The DSPs responded by providing these skills for hire: some of them have become, by now, de facto media buying agencies. Some of them have begun buying media on behalf of marketers, rather than agencies. DSPs are now confronting the classic tradeoff between easy revenue growth as a professional services company and valuable revenue growth as a technology company****.

The agencies see the danger of being displaced as the primary owner of their customer, the marketer. There are two responses: buy or build. The ad agency holding companies will inevitably buy some of the DSPs that choose to become marketer's agents (as they bought the interactive agencies and the SEMs.) The ad agencies will also begin to build in-house expertise in using the DSPs. This will be painful for them because they will be competing to hire people who understand numbers, and these people are far more expensive than their traditional hires. If an agency wants to hire someone with the analytical skills that would enable them to work at an investment bank, then they will need to pay them like an investment bank. How this sits with the purchasing departments of the major marketers--who sometimes seem more concerned with cost than efficiency--remains to be seen.

There won't be one winner, but three years from now there will be fewer than ten companies dominating the marketer's agent piece of the world. The foundations that lead to this dominance will be laid this year.

------------------* I talk about this incessantly in person but have not written about it because I have every type of conflict of interest here: financial, professional, personal, sentimental, intellectual, moral, etc. Proceed with caution.

** I have a notebook where I have 500+ companies listed under 25+ different categories, all digital display ad tech (no traditional digital agencies or ad networks, that would probably triple the count.) I didn't put this together on purpose, it was a result of talking to entrepreneurs about their potential competitors, so the count is probably low by quite a bit. I tried making a 'map', but found that it was physically impossible in two dimensions. GCA/Savvian did it by simplifying several aspects of their presentation and limiting it to the Web and internet video.

*** In many--most, if you count by dollars rather than impressions--cases, the actual number of players is currently one: the agency. The agency places the buy directly with the publisher. This also will change as publishers realize that if they don't have an agent representing them they are not maximizing revenue. It's interesting that almost no large marketers do their own media buying, but almost all large publishers do their own media selling. That may have made sense when there was one newspaper in each town and three TV stations, but not any more.

**** I have heard from one holding company exec, re one of the DSPs: "we would buy them if they valued themselves as an agency, but they keep insisting they're a technology company." Agencies sell for 6-10 times forward earnings. Tech companies sell for 40 times hope. If you somehow think the former is better, your VC wants a word with you.

13 comments:

Having trouble thinking about the future of DSP? You are not alone. While the DS, "Demand-Side", suggests that they work on behalf of client by providing campaign management and strategic bidding and valuation intelligence; the P, "Platform", signals their "neutral" technology side of business. How many DSPs currently operate under this ambiguity?

I have my doubt in the long term viability of this. How should a DSP serve the needs of competing clients - both contractually and technologically?

I can see two forms of DSP survive this challenge: either be a part of an agency's proprietary technology or be a pure technological platform; the latter form implies giving up all agency-like service offerings that may include valuation modeling and strategic bid management.

The whole industry will suffer until we come up with better acronymns. Or gets rid of them. In an otherwise good post, it's impossible to read more than 3 words without running into some ridiculous insider argot that means nothing.

I forgot to note that your summary clarifies things linguistically, and re-inforces what I mean. You say the stack will shake-out and simplify, and I'm saying that once it does, the vocabulary will be better too.

I would offer one critique to your diagram:I would align ad networks more closely with advertisers than publishers. At the end of the day, advertisers are where an ad network's bread is buttered and they work with publishers to get access to advertisers. The sale is about advertisers.

Further, if you look at how yield optimizers have effectively disintermediated so many ad networks from publishers, this is proven out. Ad networks don't maximize yield for publishers, they maximize yield for themselves. The fact that these interests are sometimes aligned is a fortunate coincidence.

The terminology is horrible, I agree. I purposely used "marketer's agent" and "publisher's agent" instead of DSP--which I consistently translate into Digital Signal Processor in my head--and (shudder!) SSP.

I also agree that the DSP's venture into agency territory was unintended and unwanted. In fact, I would venture that what they all really want is for the agencies and the entire agency function to simply disappear and for the marketers to just plug their requirements into the technology and have the technology do it all. This, of course, isn't going to happen (maybe I'll write why I believe that tomorrow).

Brent: Ad nets are all over the place, that's why their bar is so broad. In my experience, though, they sell primarily to ad agencies, not directly to marketers, that's why I drew it that way. That said and to be fair, some ad nets--Burst Media, for example--are primarily publisher representatives, IMHO. But then, Burst is a consulting client of mine. Did I mention that I was conflicted?

Based on my own unique experience, I would say that many ad networks sell to both agencies and direct. Direct is basically the only way CPA deals get done, so if a network has optimization technology for performance advertising, they are constantly trying to go direct to the advertiser. And obviously DR advertisers rarely work through an agency. The overhead of the agency damages the opportunity for the DR marketer.

With respect to Burst as an example of differently-natured ad networks, as you said, you painted in broad strokes, and breaking out "rep firms" vs "ad networks" and several other constructs might be illuminating, but I felt, really at the core, that networks tend to be about advertisers because advertisers write the checks. If P&G came to network A and said, "we want sites like X" and network A didn't have any, it would probably go sign some up. And this happens, to some degree, to the detriment of the publishers working with the network today. Swimming against the current and trying to convince the advertiser they want something other than what they say they want is usually too risky.

We always used to say, "Whatever the problem with the network was today, be it composition, yield or allocation in the marketplace, the best solution was to add more advertisers."

Well, that makes sense. I really left the entire arbitrageur space out of this writeup. In my view, the CPA/lead gen guys *are* the marketers, they just sell someone elses brand (such as it is.) That said, I haven't worked with the performance ad nets much, aside from the arbs.

I think the basic point--that we're both making--is that ad nets have an untenable conflict of interest: their "customers" are the publishers, but the marketers/agencies pay the bills.

Of course, the yield optimizers are in this same position, aren't they?

Ah, now we are getting right down to it. For most ad networks, accounting-wise, publishers are actually vendors and advertisers are customers. Publishers submit their W-9 to get paid. Still, this may be a technicality.

Another great way to tell how publisher aligned an ad network probably is would be to look at its buying habits. If they are paying fixed CPM, while publishers love it, they are 100% advertiser aligned. Their attempts to create margin and build a business are only very loosely correlated with their publisher relationships. If they buy on a rev share, they have a shared interest, so they are, to some degree, a publisher advocate.

The fundamental question is the chicken-and-egg of building a marketplace. I suspect most ad networks would say that it is a lot easier to sign up a publisher if you have a lot of advertisers than vice versa. The result is that most networks are advertiser-aligned. Solving the advertiser dilemma and creating a lot of demand is the challenge for yield optimizers, exchanges, and ad networks alike. Without demand, you cannot win.

Great piece Jerry. I might only add that the collision course you write of - the "big-bang" if you will - only help forms this ever expanding universe if it occurs before Google's gravitation force attracts the matter.

The 'arbitrageurs' (in this industry the term has come to mean middlemen who are reselling at a variable and hidden markup) are an interesting case and what the conditions that dictate the mix in a market between agents and arbs is probably buried in some paper on my hard-drive... I should dig that out.

The chicken-and-egg problem, while real, goes both ways: the ad net needs to have some minimum number of bundleable impressions before an agency will take a meeting. So signing up and keeping publishers is critical while small. The big ad nets, not so much. Interesting to think about the implications this has for entry and size in the market.